Fife-based Raith Developments had previously secured planning consent for three homes on a site at Glenrothes but had changed its plans to build 12 flats instead.
The developer sent a letter telling nine people who objected to its bid to build the 12 apartments they were liable to pay £74,100 each.
The letter said this would compensate the developer for the loss of profit from the scheme, which was refused planning permission.
It added: "If no payment is received within 21 days from this date then I would instruct legal proceedings to commence immediately for the sums due as highlighted."
Raith Developments co-owner Gordon Powell, who signed the letter, told Planning it was never meant as a request for money.
"It was not meant as an invoice," he said. "It was to say that if they object to a change of use then there could be consequences. There could be legal costs we would look to recoup."
"The letter has been withdrawn. We have dropped it completely."
Fife Council wrote to agent Davidson Baxter on 3 October explaining that the application had been refused planning permission.
The council ruled that exceptional circumstances did not exist to justify use of a mechanical ventilation system, and that the flats would be out of scale and out of character with the surrounding properties.
The planning permission remains for three houses to be built on the site.